A trust is an estate planning tool that allows a grantor to transfer assets to a trustee while still alive, and then upon death, provide for the distribution of those assets in accordance with the wishes of the grantor. A trust may be revocable or irrevocable, and it avoids the need for probate.
A grantor creates a trust by signing a legal document. In the case of real property, the settlor conveys ownership of the property to the trust; in the case of bank accounts or other financial instruments, the grantor changes the owner of the account to the trust.
The trustee, who is named in the trust document, administers the trust assets for the benefit of the beneficiaries. Trustees must make proper investment decisions in accordance with the trust documents, as well as keep records of all transactions. Ideally, trustees will have access to trust accounting software or a filing system to make keeping track of all the assets a simple task. Beneficiaries may request reasonable financial information relevant to their interests from trustees at any time.
If a beneficiary’s behavior or health declines, the trustee can take steps to protect their interests. For instance, if a beneficiary has a substance abuse problem, the trustee can withhold distributions to that person. This is possible because the trust document can stipulate that the trustee may make discretionary decisions on behalf of the beneficiary.
A trustee can also place restrictions on how a beneficiary uses trust assets. For example, a trustee can specify that the beneficiary may only use the assets for certain purposes (buy a home, start a business or fund an education). This is possible because the trust document can stipulate how the assets should be used, which is enforced just like any other clause in a contract.
The trustee must report income to the beneficiaries, which may include interest, dividends, rents, royalties and other income generated by the assets in the trust. This is done to comply with tax laws. Generally, beneficiaries must be provided with a formal trust accounting every year, and beneficiaries can file a lawsuit against a trustee who fails to provide these documents in a timely manner.
If the trustee is unsure whether a particular asset should be included in the trust, or if he or she has any questions about trust law, he or she can consult an attorney. A lawyer can help explain the purpose and benefits of a trust and advise on appropriate trust language.
Trusts have a reputation for being expensive, but it is important to remember that they can save heirs money on the back end by bypassing probate. The upfront costs associated with working with an attorney can be offset by saving heirs the cost of a lengthy and complicated probate proceeding.
Choosing the right trustee is vital to carrying out your intentions and protecting family relationships. A professional trustee can offer unbiased management and guidance that can benefit all members of the family, from younger generations to older ones.